ROI Calculator Real Estate

Let your lenders and customers quickly assess how much cash flow they can generate from rental and lease payments with a Rental ROI Calculator.

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What is a Rental Property ROI Calculator?

A Rental ROI Calculator is an essential tool for real estate investors who want to quickly figure out how much cash flow they can generate from rental and lease payments after accounting for out-of-pocket and operational expenses, such as maintenance costs, taxes, insurance and mortgage payments, as well as vacancy rates.

Aside from calculating the total cash flow, a good Rental ROI Calculator will also show the Cash-on-Cash Return and Capitalization Rate so you can easily evaluate whether a residential or commercial property is worth the investment.

How to Calculate ROI for a Rental Property

Before you can calculate for a rental property’s ROI, you’ll first need to figure out your Net Operating Income or NOI. NOI is calculated by subtracting a rental property’s annual operating expenses from its gross operating income.

Net Operating Income = Gross Operating Income – Operating Expenses

A good chunk of a rental property’s gross operating income comes from rental and lease payments. But larger multi-family homes and commercial properties can also generate additional income by charging for:

  • Parking
  • Storage
  • Utilities
  • Laundry Facilities

A rental property’s operating expenses typically include:

  • Property taxes
  • Insurance
  • Repair and maintenance costs
  • Property management fees (when you are not managing the property yourself)

Do take note that operating expenses do not include your mortgage payments if you’re borrowing money to purchase the property. Net Operating Income is one of the first things creditors and lenders look at to determine a rental property’s income generation potential. By leaving out the variables of mortgage terms and payments, it’s easier to accurately compare the profitability of different real estate rental properties on an apples-to-apples basis.

One of the most popular ways to evaluate and compare the profitability and potential returns of different real estate investments is by looking at a rental property’s Capitalization Rate or Cap Rate. Capitalization Rate can be easily calculated by dividing your annual NOI with the current market value of the property.

Cap Rate = (Net Operating Income ÷ Current Market Value) x 100%

A higher cap rate means higher income potential. Most investors look for a cap rate of at least 6%, but if you’re in an expensive city with inflated real estate prices, you might be looking at cap rates of around 4% or even less.

Cap rates tend to be smaller for Single Family Rentals (SFRs) and smaller Multi-Family Rentals (MFRs) compared to apartment buildings and commercial properties. Cap rates for commercial properties can be as high as 10% or more. A 10% cap rate means you can potentially get a return on your investment (ROI) in roughly 10 years if you bought the property entirely in cash.

Cap rate is really useful for comparing similar real estate opportunities. Obviously, the properties with higher cap rates are going to be more attractive investments. It’s all part of the due diligence required to find the best value and best deals possible.

How to Calculate Cash Flow and Cash-on-Cash ROI for a Rental

Net Cash Flow is your actual profits after subtracting your mortgage payments from your NOI. You’ll get the same figure if you deduct all your operating expenses and mortgage payments from your total rental income.

Net Cash Flow = Net Operating Income - Mortgage Payments

Another important metric that a lot real estate investors look at to determine their ROI and profitability is Cash-on-Cash Returns.

Most investors use financing or levarage to build up their real estate rental portfolio since all they need to do is put up a relatively small down payment and use their rental income to pay off the mortgage. With this strategy, you don’t need to have millions of dollars up front to have multiple rental units.

To calculate for Cash-on-Cash Returns, you need to figure out your Net Cash Flow first.

Net Cash Flow is your actual profits after subtracting your mortgage payments from your NOI. You’ll get the same figure if you deduct all your operating expenses and mortgage payments from your total rental income.

Net Cash Flow = Net Operating Income - Mortgage Payments
Cash-on-Cash Return = (Annual Net Cash Flow ÷ Total Cash Invested) x 100%
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